A Swiss luxury & lifestyle retailer wanted to enter the Indian market. To figure .... to India. In addition, liaison offices were able to hire local and foreign staff, rent property and open bank ..... Many real estate developers which have put their mall.
Roger Moser Gopalakrishnan Narayanamurthy
SWITZERLAND GLOBAL ENTERPRISE: DEVELOPING MARKET ENTRY STRATEGIES FOR THE INDIAN LUXURY & LIFESTYLE RETAIL SECTOR ABSTRACT A Swiss luxury & lifestyle retailer wanted to enter the Indian market. To figure out the optimal market entry strategy, the senior executive team approached the Head of the Swiss Business Hub India of Switzerland Global Enterprise, Michael Enderle, in December 2012 to get his advice. Michael knew that although the Indian luxury market was small in comparison to global standards, it had shown a healthy growth over the last few years & was estimated by analysts to be soon 120%150% larger than its current size. The Government of India had also recently changed important regulatory aspects associated with FDI which might change the future rules in the Indian retail sector for foreign companies. In addition to the dynamic regulations, other major market specific challenges were considered including diversified consumer segments and a still weak retail infrastructure. Therefore, Michael had to analyse the status quo as well as the future outlook for this retail sector to develop a market entry proposal with implications for the Swiss retailer. Reference no …
This case was written by Gopalakrishnan Narayanamurthy (Fellow Program in Management Student at the Indian Institute of Management Kozhikode) and Assistant Professor Dr. Roger Moser (University of St. Gallen). It is exclusively intended as the basis for class discussion rather than to illustrate either the effective or ineffective handling of a management situation. The case was compiled from interviews, internal documents, and publicly available sources. The case was developed without external funding. St. Gallen, Version 1.2, February 2014 Copyright © 2014, University of St. Gallen, Switzerland. All rights reserved. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
[number] On 12th December 2012, Michael Enderle, Head of the Swiss Business Hub in India, had a busy day already and still he had a long working day ahead. Tomorrow, the senior executive team of a Swiss luxury and lifestyle retailer would come to his office and he had to make some recommendations as to whether and how the company should enter the Indian luxury and lifestyle market. Fortunately, he had already managed similar projects for other companies in the past but the Government of India had recently changed some important regulatory factors that might change the game in the future. Therefore, he had to analyse the status quo as well as the future outlook again in order to develop potential market entry strategies for the retailer. Michael Enderle gazed at the wall clock and started reading through the reports of past similar projects and recent reports incorporating regulatory changes generated by his employees for this particular consulting project.
The Luxury and Lifestyle Retail Market in India The Indian consumer market was becoming increasingly interesting even from a global perspective (Exhibit 1 and Exhibit 2). While still in an early stage when compared to other emerging markets (Exhibit 3) its year-on-year growth was almost unrivalled (Exhibit 4) and the service sector dominated the FDI equity inflows in India (Exhibit 5 (a) and Exhibit 5 (b)). Over the last decade an increasing number of international companies had entered the market and, today, practically all the big brands of the global luxury industry were present on the Indian sub-continent. India was observed to have a huge market potential with an acceptable country risk in the retail sector (Exhibit 6). This evolution over the last few years had been supported by several factors such as ongoing legislative opening of the market, the rise of the Indian luxury consumer (Exhibit 7 Exhibit 8), the increased availability and visibility of luxury brands in general, and an improvement of the relevant soft and hard infrastructure environment. Nevertheless, the Indian luxury market was hallmarked by a range of important constraints. For instance, legislation regarding foreign direct investment presented sometimes an insurmountable obstacle for many small but internationally oriented companies in the sector (Exhibit 9). In addition, high import duties pushed many Indian customers to purchase their products or assets outside the country (Exhibit 10 and Exhibit 11). Still underdeveloped soft and hard infrastructure conditions also dampened rapid growth in many respects. Therefore, although being coined with great potential and an over-proportional growth in the future, the Indian luxury market contained various impediments that international firm need to take into consideration while entering or expanding into this promising but challenging market.
Indian Luxury Market Size & Growth The Indian luxury market even though being small when compared to global standards had witnessed a healthy growth over the last several years. Analyst’s estimated that the potential luxury market size in India will be 120%-150% larger than its current size. In 2010 it was estimated to have reached USD 5.75 bn, which represented a 20% growth compared with the previous year. With 29% growth, sales of luxury products had seen the highest increase, reaching USD 2.05 bn. While luxury services had grown at 22% to reach USD 0.95 bn, luxury assets had grown at 13% to reach USD 2.75 bn.
Luxury Products Jewelry: With an estimated volume of USD 960 mn (+30% in 2010) jewelry represented the largest segment of the luxury goods market. Insatiable demand for high-end jewelry existed in the market 2
[number] stemming mainly from the Indian mind-set of buying and ‘investing’ in this range of goods. Classic Indian weddings were also a strong driver of demand for this particular segment. Thereof, neckwear accounted for roughly 45% of retail sales. Personal Care: The luxury and lifestyle oriented personal care market which consisted of cosmetics and fragrances was reported to be at USD 280 mn (+24% in 2010). Fragrances represented the larger part of the market and were dominated by male customers. But with rising employment of women, cosmetics were increasing in importance. Additional important factor was the rising middle class and the growing acceptance of western cosmetics among lower-middle income female consumers. Apparel & Accessories: Estimate of this segment was found to be at USD 280 mn (+30% in 2010). International brands generally supplied to the casual wear, formal Western wear and accessories, while Indian designers served the traditional wear market. However, the boarders became less and less clear showing developments of both parties into the opposite direction. Wines & Spirits: Despite high prices due to 150% import duties and a conflicting attitude towards alcohol among large parts of the Indian population, sales of wine and spirits had reached a volume of USD 220 mn (+25% in 2010). In general, the Indian consumer was more aware of spirits than wine and champagne but again this was noticed to be slightly changing especially with respect to wines. Electronics: 210 mn (+35% in 2010) luxury electronics market was geographically relatively widespread compared to other luxury products. The demand was closely linked to the one for luxury homes which were currently not only built in the metros but also increasingly in Tier 1 and Tier 2 cities. Watches: Sales of luxury watches had been reported to be at approximately USD 70 mn (+29% in 2010). Delhi and Mumbai represented over 70% of the market. Although demand for luxury watches existed in other cities, supply was still constrained there and new sales channels were expected to provide further growth. Home Décor: Due to an increasing awareness of international trends and the influx of various brands, many home buyers today opt for branded, western furniture. This results in a market growth of about 25% to USD 20 mn in 2010. Stationary: With the shift from inexpensive to quality products and the entry of foreign brands into the stationary market, sales volume had grown by 25% to USD 10 mn in 2010.
Luxury Services Hotels: A drop in foreign visitors which was predominantly due to the global economic crisis had dampened the industry’s growth in this segment. It was estimated to be still at 10% in 2010 (to USD 490 mn). Very recently, experts had indicated that the visa regulations for tourists had further prevented the industry to grow as expected. However, these practices seemed to change again in 2013. Fine Dining: Two opposing trends were witnessed in this segment. A large part of top restaurants were located in luxury hotels and therefore suffered from similar factors as that of the luxury tourist segment. On the other hand, the number of independent restaurants increased remarkably over the last couple of years and Indians were getting more and more familiar with the idea of spending money for 3
[number] fine dining – Indian, Chinese and Western (Italian cuisine). It resulted in a remarkable 40% market growth to USD 380 mn in 2010. Travel: Even though the economic crisis had its effects on the general travel market, the luxury travel segment was recovering very well. Growth was reported to be at 20% arriving at USD 40 bn in 2010. Spas: In the past few years, the wellness boom had reached India. With every luxury hotel now operating a spa, supply had grown steadily. The industry grew to USD 30 mn (+27% in 2010).
Luxury Assets Real Estate: After an astonishing growth over the last few years, sales of luxury homes remained at the same level (USD 1.44 bn in 2010). This was mainly due to regulatory issues and a lack of quality of labour. However, also the global economic crisis had its effects on the real estate sector and investors were more wary about the risks of real estate engagements in India. Today, further growth was especially expected in the Tier 1 and Tier 2 cities where an increasing number of companies and entrepreneurs required equivalent housing opportunities as in the metropolitan areas. Cars: With the arrival of several luxury car brands over the last couple of years, and therefore higher availability, the segment had witnessed an astonishing growth of 36% in 2010 (over 30% growth every year since 2006) to reach USD 1.01 bn. However, compared to China the Indian premium and luxury car market was still very small. Yachts: The industry environment for yachts in India was a very difficult one. Lack of appropriate infrastructure and import duties of around 30% resulted in a demand next to nil. In general the observations were in line with the expected total market size in the luxury and high-end lifestyle sector of USD 14.72 bn in 2015 which when split comprised of products of USD 5.38 bn, services of USD 1.45 bn and assets of USD 7.9 bn.
Indian Market Entry Routes Agent / Distributor Appointing an agent or distributor represents the option with the lowest financial risk but does not allow for any actual element of control about the operations or branding perception. Finding the right agent or distributor that will promote your products according to a Swiss company’s standards in the Indian market was a difficult and crucial task. Such a decision always included an appropriate due diligence. Institutions such as Switzerland Global Enterprise with profound knowledge of the market were able to help during this process.
Liaison / Representative Office Foreign firms may open liaison / representative offices in India - approval from the Reserve Bank of India required. The main purposes of such an office was to represent the foreign firm in India, explore opportunities for the parent company in India, act as a communication channel between the parent company and Indian customers or companies, and promote the import of goods and services to India. In addition, liaison offices were able to hire local and foreign staff, rent property and open bank 4
[number] accounts in India. The main restriction was that a liaison office was not permitted to under-take any business activity in India and therefore, cannot earn any income.
Branch Office Foreign firms in India were allowed to open a branch office to conduct business activities in India. These activities required a specific approval from the Reserve Bank of India. Among others, these activities included the import of goods, representing the parent company, acting as a sales agent and rendering technical support for the products supplied by the parent company in India. Restrictions were that the branch office was not allowed to engage in retail trading, manufacturing and processing activities in India.
Franchising / Licensing Doing business through franchise agreements was another popular alternative. It was a contractual relationship whereby the franchisor granted the franchisee the right to use one or more rights of the franchisor, such as the commercial name, trademark, patent, and know how to produce or distribute the franchisor’s goods or products under the brand name within specified territorial limits for a limited period of time against a material benefit or economic interest. The franchisee exercises the franchising rights under the control and supervision of the franchisor and pursuant to its instructions. Due to restrictions regarding foreign investments, franchising was a popular entry route for the Indian luxury market. Franchising offered an attractive risk/control ratio, some sort of middle way between having a local distributor and setting up a wholly owned subsidiary.
Wholly Owned Subsidiary A foreign company may establish a wholly owned subsidiary in the form of private companies, in accordance with the respective FDI regulations for their specific industry sector and segment. Unlike a liaison or branch office, this legal form profits of maximal flexibility for doing business in India within the constraints of the applicable regulations. The subsidiary company will be treated as a domestic company for tax purposes.
Joint Venture A joint venture may, for certain business activities, still be required (i.e. certain multi-brand retailing). But, even if not a requirement, many smaller companies still opt for a joint venture or choose to work with Indian partners despite disadvantages such as intercultural challenges, administrative complexity or interest balancing between the partners. This was predominantly due to factors such as the superior knowledge of the complex Indian market, the commercial real estate market or networks to customers and other business partners.
Major Challenges for Retailers in India – Status Quo India was widely cited as a good example for being a place where the trade facilitation process did not work well (Exhibit 12). Comparing the industrial policies in India with other emerging economies revealed that India and China were particularly significant with respect to specialization in global value chain niches in global and regional production networks, local content requirements to attract 5
[number] global suppliers and policies to facilitate intermediate and primary goods imports, and use of global value chain links to upgrade domestic production and brands (for large economies). Agreements that were made at senior levels of Indian government and the actuals that were implemented on the ground were not comparable and sometimes straight opposite. Some agreements were also reversed on a retroactive basis thereby leaving uncertainty to reign among importers and exporters.
Dynamic Regulatory Environment FDI Regulations Wholesale Trading: In the cash & carry wholesale trading, up to 100% foreign ownership was allowed under the automatic route. To engage in wholesale trading, licenses, registration or permits of the state government in question had to be obtained. Single-Brand Retailing: With the new FDI law which came into effect in early 2012, up to 100% foreign ownership in single-brand retiling was allowed but prior government approval was necessary. Additionally there were several conditions that had to be met in order to own over 51% of the share capital of single-brand retailers. The most prominent one being the requirement to source 30% of the value of the products sold from small Indian industries. Small industries were defined as industries which have a total investment in plant & machinery not exceeding USD 1 mn. This valuation referred to the value at the time of installation, with-out providing for depreciation. Further, if at any point in time, this valuation was exceeded, the industry was not considered as a small industry any-more. It has been argued that for most companies in the luxury sector this condition was almost impossible to comply with, therefore representing a de facto prohibition to engage in fully foreign owned or controlled single-brand retailing. There was a heated discussion about whether the government will adapt this condition by, for example, allowing companies to meet the rule over the course of ten years or applying the quota to costs instead of sales, but no definitive decision had been taken yet. Multi-Brand Retailing: The government announced in September 2012, that foreign investment in multi-brand retailing up to 51% will be allowed under the approval route in those Indian states which had agreed or agree in the future to allow FDI in multi-brand retailing under this policy. Restrictions, like in single brand retailing, consisted of a requirement to source 30% of the value of the products sold from small Indian industries which had a total investment in plant & machinery not exceeding USD 1 mn. As with single-brand retailing, if this value was exceeded, the industry was not considered as a small industry anymore. Additionally, retail outlets may be set up only in cities with a population over 1 mn and 50% of the total FDI had to be invested in back end infrastructure within three years of the induction of the investment. Most states which were important for the luxury retail industry had already announced their support for the new policy. However, implementation of the policy had been deferred, for evolving a broader consensus on the subject. Taxes & Import Duties The top effective tax rate for a foreign company in India was 42.02% compared to 32.45% for a local company. In addition, depending on the state, luxury taxes as the Delhi tax on luxury may be levied on luxury services as spa and gym visits and expensive hotels. Although reduced significantly, import duties continued to play an important role, ranging between 24% and 150% depending on the product being imported. The implication being that many consumers looked outside the country when searching for luxury goods. Companies in the sector often lowered their margin significantly to partially compensate for the high import duties. Hopes were high, that the foreign trade agreement 6
[number] between the EFTA-States and India which was currently being negotiated will bring change to the situation. Bureaucracy Excessive Indian bureaucracy was viewed as one of the major hindrances to foreign investments also in the luxury sector. In general, processes were lengthy and regulations were not clear. On average, opening a business took 29 days and importing took 20 days. In addition, India was one of the world’s toughest countries with respect to enforcing contracts, mainly due to the inefficiency of the court system in dispute settlements.
Diversified Consumer Segments With increasing economic growth, the number of potential luxury consumers was ever-expanding in India. According to a number of reports, India accounted for a middle class of 230 to over 300 mn people, with an upper class of roughly 20 to 25 mn people. Expectations exist in India to have 400,000 millionaires by 2015. These numbers were expected to grow over-proportionally in the future. In addition, India was a “young” country as over 50% of India’s population was below 25 years of age and the average luxury consumer was between 35 and 45 years old. Moreover, the Indian luxury sector was still a very nascent industry which made it difficult to exactly predict how buyers and suppliers will act in the future. Indian consumer segments for luxury sector included medium-size enterprise owners, traditionally wealthy families/industrialists, corporate executives, self-employed professionals, young professionals, expatriates, politicians and bureaucrats, and city-wise subsegments. Medium-size Enterprise Owners Medium-size Enterprise Owners represented the largest luxury and high-end lifestyle consumer segment in terms of numbers. They ran businesses with revenues of over USD 8 million per annum. With rapid economic growth many medium-size enterprise owners had gained considerable wealth in the last twenty years. They were getting increasingly open to the idea of spending their money on luxury and lifestyle goods. Generally, the second or third generations of medium size enterprise owners spent more money. Having studied abroad and being significantly influenced by the internet and social media, they knew luxury brands from all over the world and were less reluctant to show their luxury and lifestyle-focused way of living. They were frequent luxury consumers but still quite price sensitive. Due to high prices for luxury and high-end lifestyle goods in the country, they still often travelled abroad (e.g. Dubai) in search for better prices. Traditionally Wealthy Families/Industrialists Representing the ‘old money’, the first sub-segment, the traditionally wealthy families had been spending on luxury goods for decades. The other sub segment comprised of the owners of the largest Indian corporations, which had come up in the last two decades and had become very wealthy in a short period of time. Price sensitivity had been reported to be less an issue in this segment, but due to frequent travelling, they also spent a considerable amount of money on luxury goods outside the country. Corporate Executives This segment was made of senior executives and bankers which earned more than USD 225,000 p.a., mainly located in the metros. They were in large part in their mid-late forties, had seen the world, were highly educated and were aware of brands. Many in this category had a middle class back7
[number] ground and had a more conservative view on luxury lifestyle. Although having the potential, they were somewhat reluctant to spend massive amounts of money on luxury and high-end lifestyle goods and services; partially due to their background. With higher acceptance for a more luxury and lifestyle oriented way of living in Indian society, this might be set to change. As the medium-size enterprise owners they had specific price sensitivities and shopped on their frequent business trips outside of India. Self-Employed Professionals Professionals such as lawyers, doctors and architects shared many characteristics with the mediumsize enterprise owners. Many of these had also risen from a middle class background and therefore tended to have a relatively conservative view on the luxury lifestyle. Young Professionals Compared to the other segments, these had the lowest spending power, but their disposable income should not be neglected. In part due to the internet, this segment was increasingly westernized and knew more about the latest fashion trends in Milano or New York than many of their European peers. Having grown up in a more modern India, they tended to be more open to a luxury and life-style focused way of living with less price consciousness. Expatriates Lack of appropriate workforce was a widely known problem in many industries in India. Therefore, companies still employed skilled foreign workers. In general, due to their high educational levels, these expatriates enjoyed considerable remunerations. But they also flied regularly to buy luxury goods in their respective home countries. Also given their limited number as compared to the other segments, they were rather interesting for highly specific services and products in much focused areas of the major metros. Politicians and Bureaucrats Politicians and bureaucrats formed a large segment in the luxury and high-end lifestyle market. Slightly higher concentration of this segment was found in Delhi due to the fact that the city was a home to the national government. City-wise Sub-Segments In some of the major cities, sub-segments of consumers can be found. Mumbai, the financial and trading hub, was home to most stock brokers and diamond merchants. In Delhi, segments as large industrialists, traditional wealth and, as mentioned above, politicians and bureaucrats who had to be considered when evaluating market entry or expansion plans. Similarly to the capital, in Chennai, industrialists and old money played an important role. Due to the construction boom and its role as a Global IT Centre, in Bangalore, company owners and executives of these two industries form the major segments.
Consumer Behaviour In general, Indian luxury and high-end lifestyle consumers valued quality, exclusivity and social appeal. As mentioned above, they tended to be highly price conscious (“value-for-money”) and due to their social background, had still often a conservative view on luxury and lifestyle-focused consumption. Traditionally wealthy and young professionals tended to be less price conscious than the other segments. 8
[number] Greater Awareness With an increasing number of available brands, new malls and magazines and the influence of the internet, awareness of brands was changing positively from a corporate perspective. With this evolution, brand loyalty among consumers was emerging but still at an infant stage. The brands who profit most from this were the ones that had entered the market early on. Fashion Consciousness With the young population paving the way, fashion consciousness, mainly in metros and tier 1 cities was increasing. This trend was influenced heavily through new magazines and the internet. Price Consciousness The average Indian luxury consumer tended to be very price conscious (“value-for-money”) as had been known for some time. The primary problem for international companies lied within the high import duties of 24% plus. Luxury products often cost considerably less overseas. Therefore, consumers had a high propensity to buy luxury goods overseas, for example in Singapore or Dubai. Foreign companies in the industry had to revise their pricing and accept lower margins to attract more sales locally in India. As soon as import duties gets lowered, which was expected in the short to middle-term, the advantage of having regular and partially loyal consumers in their Indian outlets might be substantial. Indianization of Products Luxury and high-end lifestyle brands had to be relevant to the Indian consumers' own experience. Indian consumers had specific tastes and most international brands did not pay enough attention to this. For example, Hèrmes, as one of the only foreign brands reacting to this issue, introduced sarees (traditional dresses for women that consisted of several yards of light material draped around the body) into their Indian collection and had considerable success with it. Digital Media Digital media was expected to undoubtedly grow in importance in the short-term. In the Indian market where consumers in Tier 2 and Tier 3 cities were quite hard to reach, the internet and social media represented a relatively cheap way of interacting with current and future consumers. Due to the sheer size of the sub-continent, online retailing was increasingly considered to be an appropriate medium to target luxury and high-end lifestyle consumers outside the major cities. Attractive Shopping Experience India lacked high-street destinations comparable to New York's Fifth Avenue or London’s Bond Street. Additionally, there was a lack of premium malls. Therefore, finding the appropriate premium environment for a brand was difficult. Despite this unfavorable situation, the demand for attractive shopping experiences among the Indian luxury and lifestyle consumers was growing. Indians wanted to get the feel and the ambiance of luxury shopping and they knew it from the West or destinations like Dubai, Singapore or Hong Kong. To achieve a successful market entry, brands in the sector
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[number] imperatively needed to resolve this problem jointly with their partners in the construction industry and local investors. Latest and Complete Collections Over the last few years, a major issue was that the latest and complete collections were often not sold in the Indian market. Luxury companies brought their products with a significant delay to India. For a luxury or lifestyle brand to be accepted and successful, they must respect their Indian consumers and their increasing knowledge of trends and collections. Only by offering the same range of latest products at the same time as elsewhere, companies will reach out to the educated luxury consumers and possibly increase loyalty to their brand in the future. In the Indian luxury and lifestyle sector, almost nothing worse today exist than giving the Indian consumer the feeling to be ‘second choice’. New Cities While Delhi (40% to 50% of luxury market in sales) and Mumbai (30% of luxury market in sales) constituted the biggest part of the luxury and high-end lifestyle market, there were new cities that had started to play an important role. Mainly Bangalore but also cities like Chennai, Hyderabad, Pune, Chandigarh and Surat, among others, were becoming increasingly interesting. As of today, around 23% of luxury stores were now found out-side Mumbai, Delhi and Bangalore.
Soft & Hard Retail Infrastructure Soft Retail Infrastructure Staff: One of the major problems in the Indian luxury and high-end lifestyle industry was the requirement for talent with the right retail and service working experience, understanding and mindset. An absence of the manpower had hindered many luxury companies from being able to provide the same consumer service experience as compared to other locations in the West and Asia. No appropriate education and training system was in place to provide talent to the luxury industry. Recently some projects to counter this issue had been developed such as the joint venture between an Indian company and SDA Bocconi School of Management (Italy) launching a luxury business management program. But the problem still remained – especially with respect to the sales staff. By 2022 the Indian luxury products and service segment will require close to 1.76 million trained people working at all levels. Today, there were basically only two options, employ expats or train employees within the company. However, both solutions come along with specific difficulties and drawbacks. Retail Space: Traditionally, most luxury brands in India had been sold in 5 star hotels and standalone stores. However, due to unreasonably high rents, these businesses were often financially not sustainable and rather had to been as investments. Over the past couple of years, a few luxury malls had opened their doors in major cities, for example DLF Emporio (Delhi), UB City (Bangalore) or the Palladium (Mumbai). Although these malls offered a premium shopping environment and the ‘right’ ambience for luxury and high-end lifestyle companies, rents were considered to be too high in these malls. In addition, real estate players had converted most mall projects that should have been built lately into residential buildings during the recession. This had led to the current situation of low supply of premium retail space. Several premium malls were in planning or under construction but it was expected to take some time until they opened their doors to the public. Apart from malls, currently there were limited distribution alternatives. Luxury high streets lacked enough quality 10
[number] supply in India, except maybe for the Bandra Linking Road in Mumbai. In addition, due to high temperatures and a humid climate during monsoon, wealthy consumers preferred shopping in malls. Acceptable solutions for the retail space issue existed scarcely. Larger corporations were potentially able to build their own stores. For example, Louis Vuitton moved into a heritage house in Mumbai’s Horniman Circle. For smaller companies, an alternative might be to team up with other luxury retailers and create their stores on a co-operational basis. Hard Retail Infrastructure Transport: India’s transportation infrastructure was poor and in dire need of investments. Roughly one-quarter of state and national highways were heavily congested. It could take four to five days for a truck to travel from Delhi to Kolkata, a distance of 1,500km, and about a quarter of the total travel time could be spent at state border checkpoints. For the foreseeable future this problem remains but seemed to be less an issue for the durable goods segment in the luxury sector. Power: India also faced a major energy problem mostly in the northern and eastern part of the country where power cuts occurred very frequently. Although large investments were made in the sector, due to rapid population growth and continued high levels of economic growth, this was set to continue. However, an analysis of the current situation of the luxury and lifestyle retail sector was not sufficient for Michael Enderle and his team to provide proper advice to the Swiss retailer and its potential market entry into India. For this purpose, Michael Enderle and the India Competence Center of the University of St.Gallen had conducted a Delphi study (Exhibit 13) on the future of the luxury retail and lifestyle sector in collaboration with IIM Bangalore and IIM Udaipur.
The Future of the Luxury and Lifestyle Retail Sector in India: Insights from a Delphi Study 1 The Delphi study conducted by the India Competence Center of the University of St.Gallen in collaboration with IIM Bangalore and IIM Udaipur evaluated 14 projections that assessed the quantitative and qualitative input of local retail sector experts with respect to developments in the regulatory environment, consumer behavior as well as hard & soft infrastructure.
Dynamic Regulatory Environment Projection 1: In 2017, all Indian states relevant for the luxury goods industry had agreed to the policy allowing 51% FDI in multi-brand retailing. Delphi study result: Very likely with 66% probability and a strong consensus (19)2 among the experts. The new FD regulations regarding multi-brand retailing allocated the decision whether or not to accept them to the individual state governments. In general, the speed at which Indian governmental institutions implemented changes in the retail sector had always been low. Additionally, one of the
1
This study draws on the Delphi (expert panel) method and evaluates the Indian luxury & lifestyle retail sector in future in 2017. 2 The level of consensus was measured as the interquartile distance between the 3rd and the 1st quartile. Distances below 20 were considered as strong consensus, higher than 20 but lower than 25 as moderate consensus, higher than 25 but lower than 30 as moderate dissent and distances higher than 30 as strong dissent.
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[number] highest priorities of the State Governments was to protect (small) Indian businesses and therefore, until recently they had opposed the idea of liberalizing the market. Despite this, according to the experts, the probability that all Indian states relevant for the luxury industry accepted the new rules was perceived as quite high. The fact that the most important states for luxury goods including Maharashtra (Mumbai) and New Delhi had already announced their support for the new policy probably had led to the major supportive argument for this projection: As the States that already agreed will see the FDI inflow growing, other States will want to keep up and therefore also agree to the new regulations. Projection 2: In 2017, import duties on luxury goods in India have been reduced by 75% as compared to 2012. Delphi study result: Somewhat unlikely with 45% probability and a strong consensus (20) among the experts. The high import duties on various product categories were a major challenge for foreign companies in the Indian market. Due to these taxes luxury goods often cost considerably more in India compared with international prices, which resulted in many Indian consumers shopping overseas. With moderate consensus, experts considered it rather unlikely that these import duties will be lowered by 2017. The experts reasoned that the Indian government, still having a somewhat socialist mindset, will continue taxing the import of goods in order to support Indian small-scale industries. Furthermore, panelists believed that with the growing income gap between the top of society and the poor, import duties will first be lowered on goods for mass use whereas they will remain for luxury goods. Conversely, some experts stated that new free trade agreements as for example with the EFTA (including Switzerland) will be in place and therefore import duties will be reduced drastically. Projection 3: In 2017, FDI regulations in India will not include any local sourcing requirements for (single-/multi-brand) retail companies. Delphi study result: Unlikely with 39% probability and a moderate consensus (24) among the experts. Today, FDI regulations included a 30% local sourcing requirement for multi-brand retailing (not yet implemented) and for single-brand retailing if 51% foreign ownership was exceeded. It had been argued that this restriction de facto excluded foreign luxury brands from profiting from the new, more liberal regulations. Experts generally agreed that the local sourcing requirement for foreign retail companies will persist at least until 2017. Protecting and boosting small Indian businesses, predominantly in weaker sectors, was the center of attention for the Indian government. Additionally, there was a large opposition among the Indian people against further liberalizing the retail market. Therefore, the government was expected to probably not abolish these requirements as this could do considerable political damage. However, some experts believed that the regulation could be eliminated for product categories in areas where local sourcing was impossible. Projection 4: In 2017, FDI regulations in India do not include any requirements for (single-/multibrand) retail companies regarding sourcing from small companies. Delphi study result: Somewhat unlikely with 46% probability and a strong consensus (20) among the experts. The already mentioned obligation for local sourcing in retailing further required foreign companies to source from small Indian businesses with a total investment in plant & machinery not exceeding USD 1 million. Additionally, if such a supplier exceeded the maximal investment of USD 1 million, it was not considered as a small business anymore. Arguments for this projection naturally were similar to the ones for the previous projection regarding local sourcing. In general, experts rated the probability
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[number] higher than for the local sourcing requirement as these small businesses do not have the competence to deliver the quantity and quality required by the luxury retail industry. Projection 5: In 2017, regulation details for the Indian retail sector are crystal clear. Delphi study result: Likely with 56% probability but a strong dissent (37.5) among the experts. Indian bureaucracy often produced very complex and unclear regulations. Nevertheless, there was a slight tendency among experts to agree with this projection. It was expected that pressure on the government to foster economic growth will lead to more comprehensible and clear regulations. However, consensus regarding this projection was very low and some experts stated that the time frame was too short for the government to evaluate pros and cons of the regulations and to come to a final decision. Additionally, it has been mentioned that Indian bureaucrats often had no intention to clarify the regulations in order to keep their power and their additional sources of income. Projection 6: In 2017, India’s non-tariff barriers (e.g. labeling) were not perceived as significant market entry barriers for luxury companies. Delphi study result: Somewhat unlikely with 44% probability and a strong consensus (17.5) among the experts. Non-tariff barriers as for example labeling requirements were perceived as significant challenges for foreign luxury companies in the Indian market. Experts generally agreed that the situation will persist until 2017. As one expert pointed out: “As import duties were decreasing, the government would compensate by increasing the use of non-tariff barriers.” Many experts believed that whether or not non-tariff barriers will still pose a problem, will largely depend on the development of the overall economic climate.
Diversified Consumer Segments Projection 7: In 2017, more than 75% of the Indian luxury goods consumers preferred Western brands over Indian brands. Delphi study result: Likely with 57% probability but a strong dissent (37.5) among the experts. Since the Indian luxury consumer begun traveling the world, there had always been a preference for Western, predominantly European, brands. This was also due to the fact that in most product categories there was no valid Indian alternative. Recently, an increasing number of Indian brands was entering the market, trying to capture its own share. Nevertheless, experts expected that in 2017 the Indian luxury consumers still preferred Western over Indian brands. This prediction was justified with the fact that over the years, the mindset of Indian customers had made a strong connection with Western brands and that the market witnessed a strong Westernization, mainly among the younger population. Additionally, experts saw that Indian brands still had a long way to go when it was to improve the brand image on a global level. However, there also was a strong dissent among panelists. As one expert pointed out: “…people will no longer accept a product that has been imported straight from the Western world. It is in this localization of a luxury product that Indian retailers have a chance of competing against Western brands.” Additionally, it had been mentioned that with the economic, social and leadership crisis in the West, Indians were again more proud of their own heritage which should increase preference for local brands.
13
[number] Projection 8: In 2017, more than 75% of the luxury goods companies in India operate a few flagship stores in metros and sell to other geographical areas (e.g. Tier 2-3 cities) through online channels and delivery services. Delphi study result: Indecisive with 49% probability and a moderate consensus (22.5) among the experts. One of the issues in the Indian luxury market was the question about how to distribute to consumers outside the metropolitan cities. Due to the sheer size of the Indian sub-continent luxury consumers were widely dispersed and reaching them effectively and with a favorable cost/benefit ratio was not a trivial issue. With a moderate consensus, experts saw the possibility of luxury goods companies only operating a few flagship stores and selling to other geographical areas through online channels and delivery services as rather low. According to panelists, the look, touch and feel factor still was very important in luxury purchases, therefore, a physical presence will probably also be necessary in Tier 2 and 3 cities. Additionally, some mention that Indian consumers had not yet reached a state where will be comfortable buying expensive products online. On the other hand some experts reasoned that the problem of a shortage of appropriate retail space, overall cost of setting up physical retail operations outside the big cities and increased broadband penetration, this projection could very well become reality. Projection 9: In 2017, the label “Swiss Made” will be an important and positive aspect for more than 75% of the Indian luxury consumers in their purchasing decision. Delphi study result: Likely with 53% probability but a strong dissent (36) among the experts. “Swiss Made” was associated with high quality and reliability all over the world. Accordingly, experts rated the possibility of the “Swiss Made” label being a decisive feature in the purchasing decision for luxury products in 2017 as likely. In general, experts stated, that the already mentioned characteristics, as high quality and reliability, usually associated with Swiss products were highly significant factors for the luxury industry. Additionally, as it was expected that price-consciousness among consumers will diminish, these characteristics will even gain in importance. Some experts had a more differentiated view about this issue. They stated that the projection applied only to product categories that were covered by Swiss products as watches and chocolates for example, whereas in other categories, countries like France and Italy were viewed as equally appealing to Indian consumers. Furthermore, many experts noted that lately, the positive Swiss image had suffered heavily from banking scandals and its association with black money. Projection 10: In 2017, more than 75% of the Indian luxury goods consumers were willing to pay premium prices only for truly global brands. Delphi study result: Somewhat unlikely with 47% probability and a strong dissent (39) among the experts. As luxury lifestyle was a relatively new concept to a large part of the Indian upper and upper-middle class, today, most well-known and frequently purchased brands were the truly global ones as Louis Vuitton, Burberry or Rolex, for example. For smaller and local brands it was still difficult to form an important customer base. Experts consider this to change until 2017. In their opinion, due to the high price consciousness of the Indian luxury consumer, real value will play an important role and therefore also smaller brands will be able to conquer a considerable market share. Additionally, experts reasoned that the target segments also have a strong connection to more locally embedded brands. Furthermore, as there will be an increasing number of these smaller and local brands entering the market, awareness among consumers will rise which will positively affect their willingness to pay premium prices. Nonetheless, there was a strong dissent among experts when it came to the projection. Many of them felt that as most of the growing numbers of luxury consumers have hardly 14
[number] traveled the West, they only know the “iconic” luxury brands and it will take considerable time before the average luxury consumer had widened his horizon beyond them. Some panelists stated that the question whether or not a brand was a truly global brand will not play a decisive role, rather how brands were individually perceived by the Indian consumer.
Hard & Soft Retail Infrastructure Projection 11: In 2017, more than 90% of the luxury retail companies in India will be training their employees only on the job and do not provide other formal training. Delphi study result: Indecisive with 50% probability and a strong dissent (31) among the experts. The shortage of employees with an appropriate mindset and training for the luxury industry was a well-known problem in India. Therefore, the question arises of how to best prepare employees for their demanding tasks in the luxury market. Experts were at odds whether luxury retail companies will only train their people on the job or also provide additional formal training. Experts supporting this projection stated that with the rapid growing need for employees in this sector, companies will not want to invest that much time in formal trainings and therefore rely on the job training. Additionally, in an effort to be more cost-competitive and taking into account the high attrition rates, companies will prefer not to invest in formal education. On the other hand, many experts did not believe that on the job training only suffices for jobs in the luxury sector and therefore considered formal training to be an absolute necessity. Several experts also emphasized that often training of employees does not sufficiently cover aspects as personal grooming, courtesy training, brand heritage and worldly knowledge which were considered essential in sales of luxury goods and which were difficult to learn on the job. Projection 12: In 2017, luxury retail companies in India suffer from a lack of well-trained sales staff in Tier 1-3 cities. Delphi study result: Likely with 59% probability and a moderate consensus (20) among the experts. As already mentioned, one of the most prominent constraints for the Indian luxury industry was the lack of suitable employees. The question at hand was whether the situation remain critical over the foreseeable future. Experts generally agreed that this issue was unlikely to be resolved in 2017. The main argument built on the fact that with rapid growth of the market there will be an exponentially increasing number of employees needed, whereas the infrastructure to train the staff was developing only slowly. It may take more than five years for this issue to be resolved, mainly outside the metropolitan cities the prospects were not encouraging. Arguments against this projection included the fact that companies will be increasingly concentrating on training their employees themselves, which would have a positive effect on the overall situation. Projection 13: In 2017, there will be sufficient retail space available in Indian Tier 1-3 cities. Delphi study result: Indecisive with 51% probability and a moderate consensus (22.5) among the experts. Another dominant issue in the Indian luxury industry was the lack of retail space suitable for luxury brands. This shortage was especially prevalent out-side the metros. Experts considered it rather likely that the situation will ameliorate until 2017. Many real estate developers which have put their mall projects on hold or transformed them into residential projects during the economic downturn will increasingly focus again on the development of retail space. Additionally, it was expected that the growing demand for retail space would further encourage investments in the sector. The experts supporting the occurrence of this projection generally stated that the problem will rather be about the high cost of retail space which will have a great impact on the overall business. On the other hand, 15
[number] many experts doubted that sufficient retail space, mainly in Tier 2 and 3 cities, will be available, especially because financing such projects was viewed as being difficult and because overall infrastructure development in India was considered to be slow. Projection 14: In 2017, detailed data and trend analyses about Indian luxury goods consumers in Tier 1-3 cities are easily available. Delphi study result: Unlikely with 38% probability and a high consensus (15) among the experts. Knowing the market and its consumers was key in every business. Recently, some research agencies tried to shed some light on the Indian luxury market but today information was still thin. The question arises if this situation will prevail. Experts mostly agreed that it was unlikely for detailed data and trend analyses about the Indian luxury consumer to be easily available in 2017. Although experts believed that availability of such data will improve gradually, the fact that the industry still was in a nascent state combined with the exponentially growing consumer segment lead to a general belief that it will take more time for this projection to become a reality. Conversely, some experts reasoned that with growing importance of the industry, research agencies and analysts will increasingly focus on the luxury segment. Additionally, some panelists noted that luxury companies themselves will have to invest in this field as their future will depend on the generated information.
Decision on Market Entry After conducting a desk research focused on the relevant characteristics defining the Indian luxury industry, interviews that unveiled the main challenges of a successful market entry and a Delphi study describing the outlook of the market, Michael Enderle created several key insights for the market entry strategy discussion with the Swiss retailer: Indian Way of Doing Business: Many “Swiss standards” do not generally apply in India. Therefore, companies had to adapt their expectations regarding the functioning of the business world. Taking a long-term perspective and finding the right balance between patience and persistence would help in countering this issue. Although Indian partners in the retail sector had become considerably more reliable and professional since the beginnings of the opening of the market, choosing partners very carefully, addressing all eventualities in contracts and controlling them rigorously was advisable. Indian Luxury Consumer: Although many Indian consumers who would have the means still were somewhat reluctant to indulge the luxury lifestyle and even those who bought luxury goods remained price conscious, India’s luxury customer base was growing rapidly and had enormous potential. Adapting luxury and lifestyle products and services for the Indian market still was an undervalued element. Companies that recognized this aspect and responded adequately will have a competitive edge in the coming years. The Indian luxury and lifestyle market was evolving beyond the metros (Mumbai, New Delhi), and Tier 2 and 3 cities, as they were growing over proportionally, had to be on the map of companies in the sector. Regulatory Environment: Foreign direct investment regulation presented today, and according to experts would continue to do so over the foreseeable future, an important hindrance for foreign firms in the retail sector. High import duties continued to pose a problem for foreign retail companies. Although tax treaties would eventually alleviate the situation, today, companies should consider lowering their margin and thereby offer competitive prices compared to global levels, to conquer a larger customer base, which in turn would allow them to benefit over proportionally in the future. 16
[number] Non-tariff barriers would remain an issue and, according to experts, even grow in importance. The problem of extensive Indian bureaucracy and unclear regulations were not expected to be less cumbersome at the end of the forecasting period 2017. Soft and Hard Infrastructure: Finding the appropriate employees and managing them presented a difficult matter. Attrition rates were high and there was a growing need for employees with the mindset and training necessary for the luxury sector. This issue was unlikely to be resolved over the foreseeable future. Companies in the sector would often have to train their staff on the job or in specialized programs. Retail space suitable for the luxury industry was lacking, especially in Tier 2 and 3 cities where this issue was likely to persist over the next five years. When searching for ways on how to efficiently and appropriately distribute luxury products to the Indian luxury consumer, creativity was an asset. Correctly evaluating the market potential of the Indian luxury market was complex and according to the experts, this issue would persist over the forecasting period. It was likely that companies would have to take the matter into their own hands. Based on the insights on the status quo and the future outlook, Michael Enderle evaluated the potential of the Indian luxury and lifestyle retail sector and considering the challenges the Swiss retail retailer would be facing. Michael Enderle finally filed all the insights and was now challenged to support the Swiss retailer in making a decision on whether to consider a market entry and how to do it or rather look for opportunities in other markets.
17
[number]
Exhibits Exhibit 1: Indian Country Trade Profile
Source: Tariff Profile Report (www.wto.org). 18
[number] Exhibit 2: Share of top countries in Indian FDI equity inflows (cumulative) between April 2000 and February 2011
Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India. (http://dipp.nic.in/English/Publications/FDI_Statistics/TOP-COUNTRIESINFLOWS.pdf)
Exhibit 3: Foreign direct investment at global level, net inflows $ millions (2011)
Source: Based on Data on World Development Indicators: Global Private Financial Flows (http://wdi.worldbank.org/table/6.9)
Exhibit 4: FDI in India: Financial Year-wise equity Inflows between April 2000 and February 2011
Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India. (http://dipp.nic.in/English/Publications/FDI_Statistics/FINANCIAL-YEARWISE.pdf)
19
[number] Exhibit 5 (a): Sector Shares and FDI Equity Inflows to India
Source: Reserve Bank of India (http://www.rbi.org.in/scripts/bs_view content.aspx?Id=2513#T2) Exhibit 5 (b): Sector-wise distribution of FDI equity inflows in India (cumulative) between April 2000 and February 2011
Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (http://dipp.nic.in/English/Publications/FDI_Statistics/SECTOR-WISEINFLOWS.pdf)
Exhibit 6: Indian Retail Potential
Source: A.T. Kearney 20
[number] Exhibit 7: Share of Wallet Evolution – Consumption by Category
Source: Ablett, J., Baijal, A., Beinhocker, E., Bose, A., Farrell, D., Gersch, U. & Gupta, S. (2007). The ‘Bird of Gold’: The rise of India’s consumer market. San Francisco: McKinsey Global Institute. Exhibit 8: Relative Growth of Spend Categories – Consumption by Category
Source: Ablett, J., Baijal, A., Beinhocker, E., Bose, A., Farrell, D., Gersch, U. & Gupta, S. (2007). The ‘Bird of Gold’: The rise of India’s consumer market. San Francisco: McKinsey Global Institute.
21
[number] Exhibit 9: Foreign Investment in India - Sector Specific Limits
Source: Reserve Bank of India (http://www.rbi.org.in/scripts/bs_view content.aspx?Id=2513#T2)
22
[number] Exhibit 9: Foreign Investment in India - Sector Specific Limits (continued)
Source: Reserve Bank of India (http://www.rbi.org.in/scripts/bs_view content.aspx?Id=2513#T2) Exhibit 10: Tariffs and Imports by Product Groups Tariffs and imports by product groups Final bound duties Product groups
AVG
Duty-free
Max
in % Animal products
MFN applied duties Binding
AVG
in %
Duty-free
Imports Max
in %
Share
Duty-free
in %
in %
105.9
0
150
100
31.1
0
100
0.0
Dairy products
65.0
0
150
100
33.5
0
60
0.1
0
Fruit, vegetables, plants
99.3
0
150
100
31.0
1.0
100
0.9
0.0
Coffee, tea
133.1
0
150
100
56.3
0
100
0.1
0
Cereals & preparations
115.7
0
150
100
31.3
15.4
150
0.0
3.7
Oilseeds, fats & oils
165.2
0
300
100
37.4
1.8
100
2.1
24.1
Sugars and confectionery
124.7
0
150
100
35.9
0
60
0.0
0
Beverages & tobacco
120.5
0
150
100
69.1
0
150
0.1
0
Cotton
110.0
0
150
100
6.0
80.0
30
0.0
99.8
Other agricultural products
105.7
0
150
100
22.5
13.2
70
0.3
6.6
Fish & fish products
100.7
0
150
13.0
29.9
0.1
30
0.0
0
38.3
0.4
55
60.6
7.6
0.5
10
36.0
22.4
Minerals & metals
-
-
0
Petroleum
-
0
4.9
18.5
10
29.7
0.1
Chemicals
39.6
0.1
100
89.3
7.8
0.5
10
7.6
2.1
Wood, paper, etc.
36.6
0
40
64.6
9.0
4.0
10
1.6
2.6
Textiles
28.9
0
161
68.9
13.5
0
143
0.9
0
Clothing
37.8
0
65
55.3
14.1
0
65
0.1
0
Leather, footw ear, etc.
34.7
0
40
50.9
10.2
2.5
70
1.0
0.1
Non-electrical machinery
28.2
7.0
40
94.5
7.3
4.7
10
8.0
18.7
Electrical machinery
27.0
26.9
40
93.7
7.3
16.7
10
6.3
52.0
Transport equipment
35.7
0
40
70.7
21.2
3.7
100
2.9
0.8
Manufactures, n.e.s.
30.8
21.6
40
42.5
8.8
5.7
10
2.2
25.4
Source: Tariff Profile Report (http://www.wto.org)
23
[number] Exhibit 11: Exports to major trading partners and duties faced Exports to major trading partners and duties faced Bilateral imports Major m arkets
in million US$
Diversification
MFN AVG of
Pref.
95% trade in no. of
traded TL
margin
HS 2-digit
HS 6-digit
Simple
Weighted Weighted
Duty-free imports TL
Value
in %
in %
Agricultural products 1. China
2011
3,560
7
9
15.8
5.8
3.0
6.2
2.5
2. European Union
2011
3,403
25
97
12.3
3.7
1.3
25.5
67.8
3. United States
2011
2,706
19
62
5.6
1.1
0.5
69.1
84.4
4. Saudi Arabia, Kingdom of
2011
1,425
17
59
12.4
3.7
0.0
26.4
68.6
5. Indonesia
2011
1,110
12
18
5.5
5.1
0.7
10.4
22.5
1. European Union
2011
48,875
66
1,064
4.5
4.4
2.1
64.0
65.3
2. United States
2011
32,875
61
747
3.7
2.9
0.4
74.1
65.4
3. China
2011
19,818
38
189
9.1
2.3
0.7
9.1
72.4
4. Singapore
2011
13,849
36
129
0.0
0.0
0.0
100.0
100.0
5. Hong Kong, China
2011
13,409
8
22
0.0
0.0
0.0
100.0
100.0
Non-agricultural products
Source: Tariff Profile Report (http://www.wto.org)
Exhibit 12: Market Entry Challenges for Swiss Luxury and Lifestyle Retailers in India Market Evaluation Swiss Leadership Expectations A major issue when planning to enter the Indian market was flawed expectations. Many “Swiss standards” as for example general process efficiency, reliability of business partners and government organizations or even appropriate employee mindset do not normally apply in India. As a global marketing and sales manager mentioned: “It’s a clash of cultures – you can’t delude yourself. The Swiss way does not work in India.” Therefore, senior managers needed to take into account the different circumstances in the market. In this respect, it was necessary to take a long-term perspective, being persistent but not impatient, being flexible, and, at least to some extent, adapting to the local peculiarities. Evaluating the Market Potential Due to the sheer size of the Indian sub-continent and the fact that its luxury sector was in a relatively early stage of development, evaluating the potential was a difficult task. Publicly available data about the luxury consumers was almost non-existent. Since a couple of years some market intelligence organizations have tried to shed some light on this subject but for most product categories data was still thin. If such data was not available, companies should invest in getting to know the market potential themselves, possibly cooperate with Switzerland Global Enterprise or the ASIA CONNECT Centre of the University of St. Gallen. Another important factor was that just ten years ago, the focus of companies in the luxury sector was almost exclusively on Mumbai and New Delhi. Recently, with higher growth rates than in metros and an over proportionally increasing number of high net-worth individuals in Tier 2 and 3 cities this had changed. Interviewed managers agreed that companies entering the Indian luxury market needed to take these new cities into consideration as valid opportunities that might even be more promising than the highly competitive markets in the metros. Adapting Products for the Indian Market: Until recently, luxury goods companies typically did not adapt their products for the Indian market. However, the Indian luxury consumer had, influenced by its cultural heritage, specific tastes and needs. Additionally, luxury companies had to understand that India was a highly heterogeneous market, for example, Northern and Southern India had two completely different cultures. This issue was not equally important for all types of products. The trend was most obvious in the apparel sector, where most of the adapting takes place. On the other hand, for products which relied on a “Swissness” 24
[number] element as, for example, in the watch industry, companies had been highly successful without focusing on this issue. The interviews with Swiss watch manufacturers had shown that they only adapted about 5% of their products for the Indian market. Most of them introduced special collections as, for example, for the Indian Formula 1 Grand Prix. Nevertheless, even if it was just a special collection, showing to the consumers that you valued the Indian culture and the specific tastes of the customers, it would help in creating brand awareness as well as brand loyalty. Market Entry Planning Choosing the Retail Location/Format Retail space appropriate for luxury products was still lacking in India. There were no high streets, too few luxury malls and retail space in luxury hotels was too expensive. Therefore, finding retail space with the right combination of footfalls and costs was a major issue. Postponing the growth of a company’s retail operations was felt better than to open a store in an environment that did not offer the right conditions and did not fit the company’s specific needs. Several luxury companies had to learn this the hard way over the last couple of years. As a global marketing and sales director mentioned: “You have to be very selective. For example in Bangalore, there are maybe five stores or malls in which we can sell our products. For this issue we rely heavily on our local sales and management team.” Entry Mode Choice Despite recent changes in Indian FDI regulations, foreign investment in retail operations remained limited. Up to 100% foreign ownership in single-brand retailing and up to 51% in multi-brand was theoretically possible but the Indian sourcing requirements de facto excluded many companies in the luxury sector from profiting from this new legislation. Companies, often relying on a “Swiss made” brand, just cannot source 30% of the material for example for a Swiss watch from Indian small businesses. As a regional sales director of a Swiss watch manufacturer said: “For us it’s impossible to source 30% from India. But if the restriction was abolished we will definitely integrate 100% owned retail operations in our distribution system.” On the other hand, due to lower risk and superior market knowledge of local companies, having a local partner can be beneficial primarily in the beginning of the market entry. Depending on the product, Swiss companies could also consider to act as a franchisor in the market as a whole or in geographically limited markets. The franchise route offered a good combination of risk and control and it allowed for rapid market growth with limited investments. Financial Planning When entering the Indian luxury market one should not be blinded by the growth figures of the different product segments. Many companies which had entered India early needed considerable time to become profitable. It was necessary to plan for the long term. Additionally, due to high import duties, companies in the sector needed to adapt their pricing and accept lower margins, to be able to offer competitive prices compared with their products in other countries. If a luxury watch, for example, can be bought for 70% of the Indian price in Dubai or in Hong Kong, Indian luxury customers will just buy them there. As a global marketing and sales director mentioned: “We accept lower margins so that people buy our products, as soon as import duties are lowered, and we believe that this will happen within the next three years, companies like us will have an edge be-cause consumers already bought our products and know our brand.” Market Entry Implementation Managing the Indian Partner Working with Indian partners can be a challenging task. Indian partners often concentrated on their own short term interests whereas the long term perspective of the partnership as a whole often faded into the background. Therefore, constant and extensive control of the Indian partner was a prerequisite 25
[number] for a successful market entry. Another issue was the solvency of the Indian partner: Due to the fact that Indian retailers were accustomed to granting high discounts to their clients, they often operated on the brink of profitability, which at times lead to the problems regarding their solvency. In general, the key to successfully entering the Indian market with a local partner was to choose carefully, draft a contract that was as detailed as possible and, again, constant control. Developing a Local Leadership Team The importance of this issue depended largely on the entry mode chosen by the company. If a legal presence was established in the Indian market, developing a local leadership team was viewed as a major challenge. Generally, managers agreed that the Indian market was best managed from inside the country. Being close to the retailers and other partners and being close to the customers appeared to be an important factor. As a senior executive noted: “It depended on how much importance you ascribed to the Indian market. If you’re not in the market it will be very difficult to position the brand the way you want it.” However, deciding about whether expats or locals should be in charge, how to recruit and train appropriate candidates and how much control was necessary was not trivial. Generally, managers stated that the main problem was the availability of suitable candidates. Although, there were large numbers of graduates coming from business schools, the amount of people who were actually fit for positions with significant responsibility was very limited. Interviewed companies did not specify whether it was preferable to employ locals or expats for their leading positions, nevertheless, in most cases the choice fell on expats. In general, it was important to include and empower the local management, align them with the company’s strategy from the beginning and invest in their development within the company. Training the Workforce A major issue of the Indian luxury market was the lack of employees with an appropriate mindset and training. All interviewed managers agreed that finding the right staff was a crucial challenge in India. Often the only possibility was to employ expatriates or train the staff on the job. In the luxury industry it was very important that the employees, especially the sales staff, perfectly understand the company, its products and its philosophy, in order for them to project the right image to the customers. As a global sales and marketing director mentioned: “We put a lot of resources in constantly training our personnel on the job. We even fly many of them to Switzerland to see our manufacturing facilities and our headquarters, so they get a better understanding of what we are about.” Local Operations Managing the Workforce Due to high market growth in India and a lack of well-trained staff, employees had many opportunities in other companies in the sector. This resulted in very high attrition rates of up to 50% per year among employees on the retail floor. There existed no easy solutions for this issue. As a regional sales director pointed out: “Our employee fluctuation was extremely high, if they earned five Swiss francs more somewhere else, they left the company in most cases. Nonetheless, we had strict standards and did not give in to demands for higher salaries as this would result in a bottomless pit. We relied on our company’s reputation as a prestigious brand and as an employer which invested in the development of its employees.” In general, a culture that fostered loyalty among the staff by showing them that they were valued and by investing in their training and developing them helps to counter this issue. However, companies entering the Indian market needed to accept, that it was impossible to completely eliminate this problem and therefore find a way to work with it.
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[number] Ensuring a Luxury Brand Experience Another major challenge in local operations was ensuring a brand experience which reflected the premium quality of the product. Often consumers did not get the same luxury feeling as in other countries. The Indian luxury consumer was generally very global with the knowledge of how first class service should look like and can be difficult. Therefore, offering the right service which allowed customers to experience the special atmosphere of luxury shopping and which made them feel respected was absolutely essential. When asked about this issue, managers agreed, that constantly offering the appropriate service level was achieved through a combination of regular control and, as already mentioned, well trained staff. As a regional brand director pointed out: “We go to the stores of our retailers every other month to check that our products are presented in the same high-quality manner as we require for our stores all over the world.” Investing in the Education of the Consumer In a market where luxury still was a relatively new concept, creating brand awareness and educating the customer about the relationship between higher price and higher quality were crucial tasks. This was all the more important as Indian luxury consumers were very price conscious. They needed to understand what constituted the superior value of the product. Additionally, there was a certain aversion against a luxury lifestyle among many wealthy Indian consumers. Brands were expected to help customers to allow themselves to purchase luxury products and services. Therefore, investing in aggressive marketing that took into account these different factors was a necessity. One regional director of a Swiss watch manufacturer stated that: “This is a major issue but it is very challenging for one single company to educate the market. Therefore, there are attempts in our group and even in the industry as a whole to change the situation.” As the digital infrastructure was ameliorated and the number of Indians having access to the internet and social media raised, companies, particularly smaller ones, saw their presence in these channels as a great opportunity to foster awareness of the brand and the luxury life-style in general. Exhibit 13: Delphi Study Methodology In today’s globalized world, the future seems even more uncertain than ever: Hardly anybody was able to grasp a sharp picture of how tomorrow will look like. Especially in emerging markets such as India the perceived uncertainty and ambiguity regarding future political, economic and social developments was high. This may be due to the strong economic growth, the changing society, and the way domestic institutions framed the “rules of the game” for these markets. Such a situation was particularly challenging for senior executives of Swiss companies in India. They were responsible not only for the tactical but also for the long-term planning and needed to take various and diverse possible influences into account that may be of relevance prior to their occurrence. Strategic and operational flexibility were nowadays key competitive factors in such markets. This study was based on the Delphi (expert panel) method. The Delphi method was suitable for the collection of both qualitative and quantitative data on projections for possible future developments and had gained a solid reputation for collecting disputed expert opinions. Capturing disputed judgments as well as interpreting qualitative data was imperative for this study’s character: it explores the unknown. The applied Delphi method in this study was a web-based, multi-level information sharing survey tool. The application of the Delphi method in this study was structured in three main phases: 1) Identify relevant topics and issues about the future institutional environment of an industry and formulation of specific projections. 2) Sharing of perspectives for each projection based upon each participating expert’s experiences. 3) Analysis and synthesis of the shared knowledge and perspectives. 27
[number] An extensive desk research was first completed to identify relevant topics. Second, the topics identified were further evaluated and modified during interviews with several industry experts and managers of Swiss companies operating in India. Lastly, the affirmed topics were merged into fourteen projections for the Indian luxury and lifestyle sector in 2017: Six regulatory environment projections, four consumer environment projections and four hard and soft infrastructure environment projections. The Delphi tool used in the study allowed the 22 participating industry experts to assess the projections, shared their reasoning with other experts, reviewed the other expert’s arguments, and reconsidered their own assessments. The experts rated the 14 projections regarding the probability of occurrence (0-100 %) and underlined their assessment with individual statements. All 14 projections were finally evaluated based on both the experts’ quantitative and qualitative assessment. A Guide to Understand the Quantitative Results of Delphi Studies The results of Delphi studies contained both quantitative data (experts’ assessments on probabilities) and qualitative data (arguments of the experts why there is a high/low probability). While the evaluation of the qualitative data was based on the content analysis of the written expert statements, the evaluation of the quantitative data required some additional information in order to interpret the figures on probability correctly. The purpose of Delphi studies was – in this study’s context – to increase transparency on the potential future business environment of a specific industry (segment) in India. Projections where all participating industry experts agreed on high or low probabilities was easy to interpret and use, but they unfortunately did not result in an opportunity to gain insights that might lead to future competitive advantages. Projections that were clear with respect to their probabilities can be considered common knowledge in the industry. It was therefore more important to understand the relative distribution of the expert judgments between 0% and 100% probability and to understand the arguments of experts who either tended towards a 10% or 90% probability. This was the reason why the probability and the degree of consensus among the experts were examined as a first indicator for how an average 10% or 90% probability can be interpreted. Given a high degree of consensus for a specific probability among the experts, it was quite useful to look at their qualitative arguments to understand why they uniformly believed in a probability. Given a high degree of dissent among the experts, the analysis unveiled whether the dissent is due to a “flat” distribution of the probability opinions between 0% and 100%, or whether there were, for example, two culminations around 10% probability and around 90% probability. Then, it was particularly useful to evaluate which specific arguments the two groups of experts used to justify their rather low or high probability assessment. The Delphi technique attempts to achieve consensual validity among raters/experts by providing them with feedback regarding other raters/experts responses along with their background reasons. Delphi method is basically a communication device that is used for achieving consensus on a complex problem among raters/experts. Delphi technique’s main objective is to provide a structured approach for collecting data in situations where the only available alternative may be an anecdotal or an entirely subjective approach.
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